Tax Credits. The new law provides small employers with a tax credit (i.e., a dollar for dollar reduction in tax) for non elective contributions to purchase health insurance for their employees.
Eligibility. To qualify, a business must offer health insurance to its employees as part of their compensation and contribute at least half the total premium cost. The business must have no more than 25 full-time equivalent employees (“FTEs”), and the employees must have annual full-time equivalent wages that average no more than $50,000. However, the full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of less than $25,000.
Years Available. The initial credit is available for tax years beginning in 2010 through 2013. Health insurance coverage purchased from an insurance company licensed under state law will qualify for this first phase. After 2013, the credit is only available on coverage purchased through a state exchange and is only available for two years.
Amount of Credit. For tax years beginning in 2010 through 2013, the credit is generally 35% of the employer’s non elective contributions toward the employees’ health insurance premiums. The credit is 50% for tax years beginning after 2013. The credit phases out as firm size and average wages increase.
Special Rules. The employer must reduce the deduction for the amount it pays in health insurance by the dollar amount of the credit. For example, if an eligible small employer pays 100% of the cost of its employees’ health insurance and the amount of the tax credit is 35% of that cost, the employer can claim a deduction for the other 65% of the premium cost.
Exclusions. Self employed individuals – including partners and sole proprietors, 2% shareholders of an S corporation, and five percent owners of the employer are not eligible for the credit. There is also a special rule to prevent sole proprietorship’s from receiving the credit for the owner and their family members.
Penalty Exemption. Employers with fewer than 50 employees aren’t subject to the “pay or play” penalty for not providing coverage to their employees. For businesses with at least 50 employees, the possible penalties vary depending on whether or not the employer offers health insurance to its employees. These provisions take effect Jan. 1, 2014.
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